Trading with one’s neighbours, or proximity trade as it is called in the literature, is supposed to be the most advantageous form of exchange. The main reason for this is the low costs of transporting goods. But there are other reasons why proximity trade works—tastes and consumer preferences can be similar in neighbouring countries, it is easier for smaller firms to scout out a neighbouring market, the frequency of delivery can be much higher, and export lots can be smaller sizes (again something that is a huge advantage for smaller firms). At the same time, cross-border trade can be advantageous if there is a price differential between the markets of two neighbouring countries.
To give an example, it makes sense for Pakistan to export made-up lawn textiles to India, given that it has achieved a comparative advantage in the product, has a glut in its own market, and has a large market next door where consumers wear the same sort of clothes, and have a similar climate. Similarly, there are a number of Indian products which would, and do, find excellent markets in Pakistan. EU trade thrives precisely because of this; the market is segmented even for one product. The French make reliable, small cars, but many consumers there prefer to drive the more luxurious, high-end German ones. British designers specialize in winter wear, but now that hot summers are a feature of northern Europe thanks to climate change, Spanish chains do excellent business in summer wear and beachwear in the UK.
It all depends on the neighborhood though. The sub-continent in particular, and South Asia in general, has little interest in gaining from proximity trade. For Pakistan, for example, only a quarter of total trade (averaging for exports and imports) is with its neighbours.
Trade with India is restricted because of the imposition of non-tariff barriers on both sides, but particularly by India, which has exhibited a shocking lack of logic when it comes to opening up its markets to its immediate neighbour. This is the case despite the fact that it has given Pakistan Most-Favoured Nation (MFN) status. For example, all exporters sending cement to India are required to obtain quality certifications from the Bureau of Indian Standards. But Pakistani business organizations contend that their quality certificates is inordinately delayed. Sometimes, restrictions are explicitly directed at Pakistan. For example, India has, in the past, banned the import of raw cotton from Pakistan on the grounds that it contained strains of virulent bacteria, although the same cotton was successfully exported to other countries. Pakistani exporters have also complained of upward revisions in valuation of goods imported from Pakistan by Indian Customs.
For Pakistan, only a quarter of total trade (averaging for exports and imports) is with its neighbours
Trade with Iran is hampered by international sanctions that Iran faces, and also by the fact that Pakistan is wary of being perceived as being too close to its western neighbour. There are any number of reasons for this, most of which are glaringly obvious in light of recent developments.
Trade with Afghanistan is a disaster. Even in years when Afghanistan’s security situation has allowed a healthy growth in Pakistan’s exports to that benighted country (and in 2012, for example, 9.5% of Pakistan’s exports went there), the smuggling that takes place under the cloak of the Afghan Transit Trade (ATT) pretty much negates any gains that Pakistan could envisage. In 2012 for example, Pakistan’s exports to Afghanistan amounted to $2.3 billion, but an estimated $5 billion worth of smuggled goods entered Pakistan through leaks in the ATT.
That leaves China. So far, trade with China has taken place primarily through maritime routes, as the land route goes through difficult terrain (essentially cutting through some of the highest mountains in the world), and opens out (in China at least) into a relatively small, marginalized market. For all intents and purposes then, trade with China does not have any proximity advantage as it currently stands. Changing that situation is one element of the rationale behind CPEC. But it is too early to discuss how land-based trade with China will unfold.
On one hand, Pakistan has the two most populous nations of the world, which are also among the most rapidly developing economies, on its borders. With one of them (India), it shares common languages and a cultural heritage which dictates choices in food, clothing, entertainment and the arts. The same is true of another neighbour (Afghanistan), which, though a smaller market, is also culturally and socially familiar territory. A third neighbour (Iran) has excess reserves of a scarce resource (energy) much needed in Pakistan. It is a travesty that less than a fifth of trade flows across these borders.
It goes without saying that Pakistan is not solely responsible for this state of affairs. Attitudes have hardened in both India and Afghanistan for instance, and closer economic ties seem increasingly elusive in the current geo-political scenario. Nevertheless, Pakistan can make more of an effort at least with Iran, not least by avoiding actions which clearly place it in a coalition of countries clearly hostile to the latter.
As it happens, China is the only neighbour with whom Pakistan is looking to forge closer ties. These initiatives could be a game changer for the country, but should not serve to narrow Pakistan’s vision northwards. CPEC investments may be coming about primarily to facilitate trade with China, but are certainly not to be restricted for that purpose. The investment in infrastructure should help make Pakistan more competitive in a global economy and position it to take advantage of emerging markets in Central Asia and Eastern Europe to name just a few. It is precisely for this reason that Pakistan must enforce its regulatory requirements, its health, safety and environmental safeguards, so that its products remain competitive for a global market.
Internationally, there is more and more emphasis on regional cooperation and integration of neighbouring countries into groups that forge strong trade and commercial ties. In South Asia on the other hand, there is an ever-present risk of escalating conflict, which overshadows economic relations. There are no easy ways out of this situation, but one thing is for sure: South Asia in general and Pakistan in particular are swimming against the tide by failing to forge closer links with neighbours. The long term costs of this may be formidable, particularly in an ever more closely integrating world.
The writer is an independent researcher based in Islamabad